Risk encompasses all of those things about which we are uncertain. In today's terms this would include a checklist that is topped by a favorable outcome in the war against terrorism and the recovery of the U.S. and world economies. Given the probable range of outcomes, the stock markets have priced in the worst scenario.
On Oct. 8, UBS Warburg's Global Investment Strategist Ed Kerschner presented three scenarios that could "play out" over the next two years. He labeled the possibilities "The Good, The Bad and The Ugly."
The Ugly: More terrorist events occur on a regular basis. Confidence continues to erode. GDP is negative well into next year, and corporations fail. In this scenario, profit margins (already weak) continue falling, and leading companies' earnings drop another 15 to 20 percent vs. this year's anemic earnings.
The Bad: Subpar economic growth in 2002 is primarily …